CFO Finds Signs of Life in the Rust Belt

Even before the downturn, the prospects for growth in America's industrial heartland were grim. Now, with the troubles faced by the auto industry and its numerous offshoots, you might think that a CFO for a packaging and machine-parts manufacturer in Bloomfield Hills, Michigan — about 20 miles from the meltdown's epicenter in Detroit — might be reserved in his optimism. But that would be before you met Mark Zeffiro, the finance chief of TriMas Corp.

After nearly 15 years at General Electric and 4 years at Black & Decker, Zeffiro came to TriMas in June 2008 fully steeped in Six Sigma and raring to make the diversified holding company more efficient. What he found was a company with five businesses running pretty much on their own steam under a loose holding-company structure. It includes an aerospace and defense unit that Zeffiro has come to regard as a prime growth engine; its Cequent segment, a complex maker of various transportation that took in 42% of the company's 2008 revenue, which the finance chief thinks of as a "cash cow"; and energy, packaging, and engineered-components units.

Along with the other top executives, Zeffiro set about changing the company from a holding-company mentality to an operating-company mind set. That has meant instituting a paint-by-the-numbers compensation system that rewards the wringing out of material costs; quarterly rolling forecasts that enable the company to quickly decide which projects to scrap and which to invest in; and looking at five metrics — cash, inventory, orders, sales, and production — from each of the businesses every day.

As part of the effort, the company has stripped out a layer of management, according to the CFO. All the divisional finance officers now report directly to Zeffiro, who's in the midst of reducing the U.S. component of his 150-person finance staff to accommodate the addition of 30 to 35 employees in India. The delayering of management has driven him and company chief executive David Wathen to talk with each one of the company's divisions "with intensity" — a phrase that Zeffiro uses a lot to refer to the effort the company is making to focus on operational speed and lowering its cost in order to compete in a tough economic environment.

"What we have to do is to drive operating principles and efficiencies and productivity in those businesses that have been the mainstay of most of Corporate America for many years." — TriMas CFO Mark Zeffiro

On the cost front, the finance chief says, the company is on pace to meet the goal of its "profit-improvement plan" and save $30 million in 2009. That has involved looking under many rocks for excess costs and included such actions as changing the company's listing from the New York Stock Exchange to Nasdaq, lengthening its payment terms, and gently reminding its customers if their bills are overdue.

Much of the cutting, however, has involved payroll. In terms of layoffs, the toll has been "pretty drastic," Zeffiro acknowledges. Overall, the company has laid off about 20% of its workforce in the past five months. Further, TriMas has invoked a hiring freeze on salaried employees, merit-pay deferrals, and mandatory four-day work weeks, and required weeks off without pay.

Zeffiro met with CFO's Karlo Bustos, Sarah Johnson, Marie Leone, and David Katz in New York on September 10. That was the day after President Obama's speech to Congress on health-care reform, which Zeffiro discussed along with his views on cash dynamics, operating efficiency, and other matters. An edited version of the interview follows.

Your company is headquartered in Michigan, one of the states hardest hit by the economic downturn. How do conditions look on the ground?I'll tell you, Michigan has had a tough road of it. It's interesting, though, as you travel around and you spend time talking with investors or with people who have just been reading the news, you'd think that most of the state was out on the street with tin cups. That's a bit extreme.

But isn't the grim picture largely accurate?It actually isn't. You see certain segments that are actually doing pretty well. [General Electric chief executive] Jeff Immelt was up there a month or so ago and launched an 1,100-person technology center for research and development. There are also the video and film industries. And our state is surrounded by fresh water, and freshwater technology is taking huge steps forward in Michigan. Of course, if you put it all in the context of the Big Three [automakers] and all the layoffs, it's not what it was 15 years ago, with 300,000 professionals in the immediate area. There's been an impact, no doubt, but not as drastic as one would otherwise expect.

So there are white-collar opportunities in Michigan, including good prospects for CFOs?Well, good prospects for CFOs who are not from the auto industry. One thing I've learned from having interviewed certain folks from those industries for possible roles within TriMas is that they operated differently. There was a lot of heritage and legacy as to how they actually ran their companies. And quite frankly, it wasn't as efficient as the enterprises that I grew up in, like GE and Black & Decker.

The Detroit News and other media outlets have reported that Ray Young, the current CFO of General Motors, may be on the way out. Young came up through the ranks during a 27-year career with the automaker. That seems to underline your point.Exactly. If you're talking about reengineering or transforming a company, can you do it with the same guys who have been running the company or been in the ranks for 30 years? On the other hand, those are pretty complex organizations. So you need somebody that's capable of understanding the nuances that are privy to GM, Ford, and Chrysler.

TriMas has a strong involvement in the smokestack industries. The outlook hasn't been very good in that sector for years, and seems bleaker in the context of the current downturn. What's your path to success?We play in focused market spaces, where we have products that are important to our customers. But you're right. Those industrial segments are ones that are under pressure in the recession at large. I'd say this, though: our cash-flow dynamics and our product innovation and, ultimately, our technological advantage have given us a real opportunity to compete. What we have to do is to drive operating principles and efficiencies and productivity in those businesses that have been the mainstay of most of Corporate America for many years.

This is the dawn of a new intensity for the company whereby we put very simple and direct measures in place in terms of material-cost productivity. The way we win is by being a cost-effective and low total-cost provider. We compete on service and we compete on speed.

What's a specific example of how you're applying that intensity?For example, we don't want our heavy-industry Cequent business to be a high-growth business — it's too capital intensive. But we do want to be high growth in the aerospace fastener applications. So we've deployed capital accordingly.

Describe your focus on material-cost productivity.Material-cost productivity involves designing materials and changing how they are utilized. For example, you may have metal medical applications that could be plastic. Or you have plastic that could be metal. It's about finding the most cost-effective way to use that actual product itself.

We manage our business on other metrics than material margins, of course. But it's one of the things we keep in front of everyone so they can see that productivity over time as the material margin climbs.

Are your line managers, operations people, and sales force compensated for meeting certain productivity targets?In terms of the incentives, we have five major metrics: sales and operating, inventory turnover, cash flow, new product introduction, and personal objectives. The personal objectives are tied to the strategic plan, which has specific productivity targets; that's an annual discussion. We know where they are every quarter. The [production] line leader has a subset of those responsibilities. A line leader is not necessarily going to care about sales and operating income, but will be very interested in inventory turnover and new product introduction.

How is the change from a holding-company to an operating-company mentality working out, especially during the recession?I hate to say it this way, but maybe the recession has actually been a good thing. It's not a good thing in terms of the people and the families that have been affected. The point is that it's given us the impetus for rapid change. So when you think about operating-company versus holding-company management, we're not managing each individual unit as things unto themselves, but requiring them to share information across the organization.

We started with a strategic plan whereby we picked how we wanted the businesses to play. It's OK to be a cash cow. It's OK as long as we're declaring that you're a cash cow and we're measuring you accordingly and we're compensating you well in that environment. And it's OK to be a star. But the measure of the success is different.

How do you look at a cash cow versus how you look at a star?It goes back to the vision of the corporation. We want to be an engineered, applied-technology business. For example, the Cequent business is more of an old smokestack industry kind of business. It's fairly capital intensive, and that's not who we are. It competes on brands, not necessarily just technology. The vision of the company has been to deploy cash differently. We can get higher capital returns in an aerospace business than we can in a smokestack business.

What it does mean is that I want [Cequent's managers] to run it for material productivity. I want them to run efficiently from a working capital perspective and to be effective in generating good cash flow out of the business. Whereas in the aerospace business, it might be a situation in which I say: I want you to go get bolt-on acquisitions. And I'm willing to put money on the table because I know that I'll get requisite returns. So it's a matter of prioritizing how you're going to deal with those businesses.

Was the switch from a holding company to an operating company a legal or organizational change?There was no need to change the legal structure of the company; this was an organizational discussion. For example, Cequent has a set of five businesses, which were run by five presidents, five divisional finance officers, five sales and marketing staffs, five production staffs...and I'll stop there. There are now three teams. We have a consumer-oriented one and an industrial-oriented one and one that's overseas. Those teams now operate with the customer: instead of having five different places you might call for your product, it's one. It's one invoice, one customer call, one commercial program, one pricing structure. The simplification wouldn't have happened as just a holding company with a bunch of small companies. We're driving those together to play and act like an operating team.

What changes have you made in terms of cash dynamics?That was one of the reasons I came to the company. I saw a balance sheet that was ripe in terms of its inventory and asset turnover, and it was something that we needed intensity on. I saw it as a real opportunity for the inventory to go from less than three turns to more than six.

Our operating working capital was down to $153 million for the total corporation [for the second quarter of 2009] from $176 million the previous year. We've chased working capital as a percentage of sales down, but we've also changed process along the way. The reorder points and the metrics have all changed, such that we should be able to maintain that lower level of overall working capital with lots more improvements ahead of us.

In terms of the cash-flow dynamics, we also looked at acquisitions. We've got some older properties that don't deserve to be part of the organization, and they're part of discontinued operations. We've also talked about the operating profitability of the company, and the productivity that we're going to generate is also generating more cash flow.

So what we've done in the first half of the year is generate the same amount of cash as we did all of last year. We've done that through inventory reductions, managing out payables a little better, better collections, and the repurchase of debt at a discount. Through every technique that you could possibly point at.

Including layoffs.If you think about the $30 million profit-improvement plan that we put in place, there was some restructuring that happened there. And we've done things that you've seen across industry: layoffs, furloughs, wage reductions. We've tried to do it with a heart in mind, though. I've realized that one of my tenets as a finance leader is that it's not just about the numbers. The numbers are sticky, most definitely. But I've got responsibility for 4,000 employees [the company's current workforce] and I want to make sure that I'm doing right by those 4,000 families, and that's what I go to bed with. Ultimately, I have shareholders, too. And those shareholders expect a return and they expect equity growth out of us as well.

Speaking of issues related to human capital, how do you see the health-care debate going? How do you see reform affecting you from the standpoint of benefit costs?Our health-insurance costs were rising approximately 10% a year up until 2008. And what we heard from President Obama last night will just add more pressure to that short term.

I didn't hear anything in his speech that would tell me that I naturally have a productive answer today. I have faith. I'll wait to see if there's proof in the pudding in terms of how he wants to change it. But I think that we're going to see continued health-care-cost pressures.

How will the reforms increase your costs?If indeed you have no limits [on catastrophic insurance payouts] and you have preexisting conditions as part and parcel of your basis, that's got to get paid for somewhere, and today it's not paid for. That's not to say we don't have a meaningful amount of health-care coverage for our employees, because we do. But those costs will increase reinsurance rates. There are downstream effects that I think we as a nation are still figuring out.